Use the following current year financial statements for Sambora Engineering to p
ID: 2755564 • Letter: U
Question
Use the following current year financial statements for Sambora Engineering to perform ratio analysis.
Sambora Engineering Income Statement
Revenue $3,400,000
Cost of goods sold 1,100,000
Gross profit 2,300,000
Operating expenses 1,400,000
Operating income (EBIT) 900,000
Interest expense 350,000
Earnings before taxes 550,000
Taxes (at 40%) 220,000
Net income $330,000
Sambora Engineering Balance Sheet
Current assets
Cash $800,000
Accounts receivable 450,000
Inventory 150,000
Total current assets 1,400,000
Non-current assets
Fixed assets 5,000,000
Accumulated depreciation (1,250,000)
Net fixed assets 3,750,000
Total assets $5,150,000
Current liabilities
Accounts payable $970,000
Accrued liabilities 180,000
Total current liabilities 1,150,000
Non-current liabilities
Bonds payable 1,000,000
Total liabilities 2,150,000
Common stock 300,000
Retained earnings 2,700,000
Total shareholders' equity 3,000,000
Total liabilities and shareholders' equity $5,150,000
(a) Calculate the firm’s total-debt-to-assets ratio. Assume that the firm’s prior year-end total liabilties balance was $2.4 million and the firm's prior year-end total assets balance was $5 million.
(b) Calculate the firm’s net working capital.
(c) What is the number of “days in inventory” for Sambora Engineering? Assume that the firm’s year-end inventory balance for the prior year was $100,000.
(d) What is the firm’s return on equity at the end of this year? Assume that the firm’s year-end shareholders' equity balance for the prior year was $2,600,000
Explanation / Answer
a)
Total debt to assets ratio = (Beginning liabilities + ending liabilities)/ (Beginning total liabilities + ending total assets)
= (2.4 million +2.15 million)/(5 million + 5.15 million)
= 4.55 million/ 10.15 million
= 0.4483
b)
Net working capital = total current assets – total current liabilities
= 1,400,000 -1,150,000
= 250,000
c)
Average inventory = (beginning inventory + ending inventory)/2
= (100,000 +150,000)/2
= 125,000
No. of days in inventory = average inventory x 365/ cost of goods sold
= 125,000 x365 / 1,100,000
= 41.48 days
d)
Average equity = (beginning equity + ending equity)/2
= (2,600,000+3,000,000)/2
= 2,800,000
Return on equity = Net income/ average equity
= 330,000/2,800,000
= 11.79%
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